Gear’s break-up and delisting lowballs minority investors and does nothing for the environment

WHEN shares in Golden Energy and Resources (Gear) suddenly swooned last Tuesday (Nov 8), I grumbled to my newsroom colleagues that they had crashed one of the best-performing stocks I happen to own.

Earlier that day, The Business Times had published a news report and a commentary about coal companies possibly facing financing risks as banks become increasingly concerned about environmental, social and governance (ESG) issues.

The news report and commentary – which specifically referenced Gear – said that coal companies might have to restructure themselves and offload assets that could become stranded as funding dries up.

As an owner of shares in Gear, I did not care much for this narrative. In my view, fossil fuel players are enjoying a strong improvement in profitability and cash flow that will attract financing despite the growing focus on ESG considerations.

For H1 2022, Gear reported a 201 per cent year-on-year increase in revenue to US$2.4 billion. Its earnings surged 787 per cent to US$0.11 per share. Net cash flow from operations during the six months came in at US$853.3 million – which is equivalent to more than half the company’s market capitalisation.

With shares in Gear looking cheap against its surging profitability, there had been widespread speculation in the market about the company being acquired. Indeed, Gear said on Oct 10 that it was in talks with certain shareholders, including Indra Widjaja, on a “possible acquisition of the company”.

Then came the BT report and commentary about some of Gear’s assets possibly becoming stranded.

Shares in Gear had more than trebled since the beginning of the year, to close at S$0.90 on Nov 7. By noon on Nov 8, the stock had collapsed to S$0.655 and Singapore Exchange had issued a query about the unusual trading activity.

Lowball exit offer

The following day, on Nov 9, I was forced to admit that my colleagues at BT were probably not entirely to blame for my slightly reduced net worth. In the wee hours of the morning, Gear unveiled a two-step corporate exercise that could wrest its shares from minority investors for much less than their intrinsic value.

Under the deal, Gear has proposed a distribution in-specie of its 62.5 per cent stake in Indonesia-listed thermal coal producer Golden Energy Mines (Gems).

Shareholders of Gear can choose to receive 1.3936 Gems shares (which were trading at 7,100 rupiah at the time of the announcement) for every Gear share they hold; or a cash consideration of 7,664.8 rupiah (which prices their entitlement of 1.3936 Gems shares at 5,500 rupiah each).

Gear then proposes to delist itself from the Singapore Exchange, with an exit offer price of S$0.16 per share.

Shareholders of Gear who opt to receive Gems shares will be getting a total effective consideration of S$1.045 per share, based on the market price of Gems and SGD-IDR exchange rates at the time of the announcement. Shareholders of Gear who take the cash option for their Gems shares will be getting a lower effective consideration of S$0.846 per share.

Many small investors are likely to prefer receiving their entitlement to the Gems shares in the form of cash, and will probably feel shortchanged by the low price at which they will be monetised under the deal.

Some analysts have also said the S$0.16 per share exit offer does not fully reflect the value of Gear’s remaining assets – which include a 64 per cent stake in Australia-listed metallurgical coal producer Stanmore Resources and a 50 per cent stake in gold miner Ravenswood Gold Group.

ESG narrative

More galling than the miserly exit offer, Gear has rationalised the whole corporate exercise with an ESG narrative.

Gear said in its Nov 9 announcement that the distribution in-specie of its stake in Gems will reduce its exposure to the energy coal sector, which is currently facing “ESG pressures”.

Gear went on to say this will enable it to “expand on its financing options, which would otherwise have been relatively limited if it were to be continuously exposed to the energy coal business”.

This would, in turn, position Gear to develop other business lines, the company added.

As a shareholder of Gear, I find this unconvincing. Gems accounts for the bulk of Gear’s earnings. Gear also said in its announcement that Gems’ dividend payout ratio has ranged from 81 per cent to 133 per cent over the last three financial years.

The way I see it, Gear would be narrowing its financing options for new businesses rather than expanding them by offloading its stake in Gems now and giving up its own public listing.

No environmental impact

​Stakeholders of financial institutions and investment houses that support Gear should perhaps also ask themselves what the company’s proposed corporate exercise actually means for the environment.

Gear is 77.5 per cent-owned by Indonesia-listed Dian Swastatika Sentosa (DSS), which is in turn 59.9 per cent-owned by Sinar Mas Tunggal.

The distribution in-specie of Gear’s 62.5 per cent stake in Gems will only result in another corporate entity linked to Indonesia’s Sinar Mas group becoming the single largest shareholder of Gems.

Meanwhile, the entity that is offering to take Gear private at S$0.16 per share is a recently incorporated Singapore company called Duchess Avenue that is ultimately owned by Lanny Tranku – the spouse of Indra Widjaja.

In short, the break-up and privatisation of Gear will do nothing to reduce the production of thermal coal by Indonesia’s Sinar Mas group. And, given that Gear will still be controlled by the Widjaja family after its privatisation, it seems strange that it expects to be treated more favourably by ESG-focused financiers and investors.

To be clear, I am not a climate change denier labouring under the belief that the era of fossil fuels will never end. All things being equal, I would prefer that companies in which I am invested do not contribute to climate change.

However, given the elevated profitability Gems is currently experiencing, Gear would arguably achieve more for the environment as well as its shareholders if it kept the thermal coal producer in its fold even as it works towards developing new businesses that do not face ESG pressures.